As featured on p. 218 of "Bloggers on the Bus," under the name "a MyDD blogger."

Tuesday, March 24, 2009

Regulatory Authority For Treasury

There's one theory that this public-private plan for bad assets was attractive to the Administration because it can be carried out without Congressional input. Clearly the environment in Congress would not necessarily generate legislation authorizing more money for the Treasury, and so structuring it as a loan, which the FDIC and the Fed already have the authorization for, makes a bit of sense.

It makes some political sense. Obviously, Obama thinks the big fight on the Hill will be the budget, and would rather not get distracted with months of a protracted battle over the banks. In the end, however, you can't hide from Congress. And if more statutory authority is required, maybe the Administration ought to go get it.

The Obama administration is considering asking Congress to give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, according to an administration document.

The government at present has the authority to seize only banks.

Giving the Treasury secretary authority over a broader range of companies would mark a significant shift from the existing model of financial regulation, which relies on independent agencies that are shielded from the political process. The Treasury secretary, a member of the president's Cabinet, would exercise the new powers in consultation with the White House, the Federal Reserve and other regulators, according to the document [...]

The administration's proposal contains two pieces. First, it would empower a government agency to take on the new role of systemic risk regulator with broad oversight of any and all financial firms whose failure could disrupt the broader economy. The Federal Reserve is widely considered to be the leading candidate for this assignment. But some critics warn that this could conflict with the Fed's other responsibilities, particularly its control over monetary policy.

The government also would assume the authority to seize such firms if they totter toward failure.

I actually would vote against this, and I'll tell you why. The goal shouldn't be to seize companies engaging in what amounts to banking. It should be to end the shadow banking system, permanently. Similiarly, I like the systemic risk regulator idea, but instead of overseeing companies that are "too big to fail," we should probably just break them up, and put a ceiling on how much of the economy they can involve themselves in. We need to shrink the financial sector relative to the economy. I fail to see how these steps get us there. In fact, they perversely allow for a bigger role for the financial sector, because of the safeguards.

The Administration's on the right path here, but still not all the way down the mountain. Furthermore, everyone neglects the regulatory laws on the books already that just need to be enforced more broadly.

...Kevin Drum thinks this is another step to get the authority for nationalization, which is certainly possible.